MARC Ratings has affirmed its ratings of MARC-1_IS /AA-_IS on UEM Edgenta Berhad’s Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) under its Sukuk Murabahah Programme of up to RM1.0 billion. Concurrently, the rating outlook has been revised to positive from stable. The outstanding sukuk currently stands at RM250.0 million.

The rating affirmation incorporates UEM Edgenta’s well-established track record in providing healthcare support services (HSS) to the healthcare sector, and maintenance services to the infrastructure sector. The affirmation is underscored by the group’s resilient credit profile, characterised by low leverage and a healthy liquidity position. The outlook revision reflects the continued progress UEM Edgenta has made in strengthening its key businesses that would increase its operating margin and consequently strengthen its financial performance.

Providing HSS to government and private hospitals in Malaysia, the group steadily expanded its operations to private hospitals in Singapore and Taiwan through its wholly-owned Singapore-based subsidiary UEMS Ltd. As at end-September 2023, it serves 300 hospitals with contracts worth RM2.3 billion. The rating agency notes positively that the steadily increasing overseas contracts have led to a decline in the contribution from lower-margin government contracts to 54% as at end-June 2023 from 82% in 2018. Notwithstanding this, the group is exposed to contract termination and renewal risk, although the rating agency views this to be low on the basis of the group’s established track record.

In regard to infrastructure services undertaken through wholly-owned Edgenta PROPEL Berhad, UEM Edgenta benefits from a long-term master maintenance services contract worth RM6.3 billion with related company Projek Lebuhraya Usahasama Berhad (PLUS) that provides assured income stream through 2038. It provides maintenance services for over 3,500km of highways and state roads. It has also secured highway maintenance contracts in Indonesia.

The group is expanding its services to the United Arab Emirates through a 60% equity-stake acquisition in a local property management company, Kaizen Group, for RM55.1 million. This follows the earlier acquisition of a 60% stake in a local facility management company in the Kingdom of Saudi Arabia. The expansion signifies the group’s strategy to strengthen the division and its Middle East footprint by leveraging on its expertise and track record.

Group revenue and pre-tax profit improved to RM2.1 billion and RM62.4 million (9M2022: RM1.8 billion; RM55.3 million). Operating profit margin gradually improved to 3.7% in 9M2023 from 2.7% in 2020 on the back of substantially reduced pandemic-related low-margin cleaning contracts. Nevertheless, operating margin was weighed down by labour costs following the increases in minimum wage in 2022 and 2023. To support further margin improvement, UEM Edgenta has expanded its scope of work under HSS by including more high-value biomedical equipment-related maintenance services, undertaking initiatives to increase automation and securing more commercial contracts with private entities. The HSS contract with the Malaysian government will expire in 2025, and negotiations for renewal are expected to begin in early 2024. The rating agency expects margins to improve going forward.

Consolidated borrowings stood at a relatively low RM508.7 million, translating to a gross debt-to-equity ratio of 0.31x with the group remaining in a net cash position as at end-September 2023. Liquidity position remains strong with unrestricted cash balances of RM606.0 million that provide a source to fund its immediate capex requirement.

Within the next 12 months, the rating would be upgraded if UEM Edgenta broadly maintains its debt metrics and continues its trajectory to improve its financial performance. Conversely, the rating outlook would be revised to stable if group financial performance substantially weakens from expectations.

Cyndy Goh, +603-2717 2941/ cyndy@marc.com.my

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my  

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my